Question

Aaron wants to buy a Tesla Model S in three years. The current price of a Tesla Model S is $65,000. Aaron's investment account earns 6.5% interest annually, and it has a current balance of $50,000. Assume the annual inflation rate will be 2%. According to this information, which of these is closest to the price that Aaron will pay for his Tesla in three years (in Year-3-dollars)?

1 $73,988

2 $68,979

3 $78,517

4 $61,251

Consider the following cash flow streams. If the discount rate is positive, which of them has the highest present value (value at t=0)?

Year Stream A Stream B Stream C

1 100 100 0

2 0 0 100

3 0 100 0

4 100 0    100

5 0 100 100

6 100 0 0

1.The three streams have the same present value.

2.There is not enough information to answer the question.

3. Stream C

4. Stream B

5. Stream A

Answer 1

Part a) Answer: 2) $68,979
If we want to compute future price of the product, then the present value of the product is adjusted with inflation rate.

Tesla price after 3years = current price*(1+inflation rate)^3years = $65,000*(1+0.02)^3 = $65,000*(1.02^3) = $65,000*1.061208 = $68,978.52

Part b) Answer: 4) Stream B
Assume discount rate is 10%

Year	PVF @ 10%	Stream A	DCF A (Stream A*PVF@10%)	Stream B	DCF B (Stream B*PVF@10%)	Stream C	DCF C (Stream C *PVF@10%)
1	1/1.1 = 0.9091	100	90.91	100	90.91	0	0
2	0.9091/1.1 = 0.8265	0	0	0	0	100	82.65
3	0.8265/1.1 = 0.7514	0	0	100	75.14	0	0
4	0.7514/1.1 = 0.6831	100	68.31	0	0	100	68.31
5	0.6831/1.1 = 0.621	0	0	100	62.1	100	62.1
6	0.621/1.1 = 0.5645	100	56.45	0	0	0	0
			215.67		228.15		213.06

Since DCF B is highest